What are the Small Business Innovation Research (SBIR)/Small Business Technology Transfer (STTR) Programs?
Through the SBIR Program, 11 federal agencies make high-risk capital available to fund R&D at the nation’s most innovative small companies. Each year, federal agencies with extramural research and development budgets that exceed $100 million are required to set aside a specific percentage of that budget to be competitively awarded to small U.S. firms under the SBIR program. With the most recent reauthorization (see next question), starting in 2017 the SBIR allocation is 3.2% of an agency’s extramural R&D budget and will remain at that level through 2022. The STTR set-aside percentage is 0.45% and will remain at that level through 2022 as well.
Combined, the agencies award roughly $4.4 billion in SBIR and STTR grants and contracts annually with these goals:
- Stimulating technological innovation
- Meeting federal R&D needs
- Fostering participation in innovation and entrepreneurship by socially and economically disadvantaged persons, and
- Increasing private-sector commercialization of innovations derived from federal R&D funding
What is the background of the SBIR/STTR Program?
The program was initially enacted in 1982 and has continuously been funded through legislation and continuing resolutions. A Policy Directive enacted from 2012 through 2017 included increased set-aside percentages, included required company certifications on eligibility, increased funding guidelines and established commercialization metrics and goals. In December 2016, the 114th Congress extended SBIR/STTR from September 30, 2017 to September 20, 2022 as part of the National Defense Authorization Act, but removed the pilot programs such as Direct to Phase II. Through FY2013, over 112,500 awards have been made totaling more than $36.2 billion. (The Award database is continually updated throughout the year. As a result, data for the given year is not complete until April of the following year. Annual Reports data is a snapshot of agency reported information for that year and hence might look different from the live data in the Awards Information charts.)
Modeled after the SBIR program, STTR was established as a pilot program by the Small Business Technology Transfer Act of 1992. Government agencies with R&D budgets of $1 billion or more are required to set aside a portion of these funds to finance the STTR activity. In 2001, Congress passed the Small Business Reauthorization Act of 1997 reauthorizing the program until September 30, 2009. Subsequently, Congress has passed numerous extensions, the last through 2017. In Dec. 2016, Congress reauthorized the program through 2022 as part of the National Defense Authorization Act for FY 2017. The goal of the STTR program is to facilitate collaboration between small business concerns and non-profit research institutions to develop and commercialize innovative products and services.
Which federal agencies participate?
|Participating Agency||FY2022 SBIR/STTR Funding
|Dept. of Defense||$2.24 B|
|Health & Human Services (NIH, CDC, FDA)||$1.25 B|
|Dept. of Energy||$319 M|
|National Science Foundation||$231 M|
|US Dept. of Agriculture||$37.9 M|
|Dept. of Homeland Security||$19.7 M|
|Dept. of Commerce – NOAA||$10.7 M|
|Dept. of Education||$11.6 M|
|Dept. of Transportation||$12.4 M|
|Dept. of Commerce – NIST||$5.5 M|
|Environmental Protection Agency||$3.8 M|
What are the benefits of the program to entrepreneurs and small companies?
- First and foremost, funding from the SBIR/STTR programs is non-dilutive capital (i.e., it requires no repayment or surrender of company equity).
- Many of the agencies fund early-stage, high-risk R&D projects for which investment capital is typically unavailable.
- Success in these highly-competitive nationwide competitions can provide validation of your technology and lead to follow-on third-party investments.
- Eligibility criteria are clearly defined. Companies need not have an operating history, or even part-time employees, in order to submit an application.
- The variety of participating agencies guarantees funding opportunities in a broad range of technology areas.
- The chance of successful funding is typically greater than that with private investors.
- Multiple awards are possible even for the same development project.
How does SBIR/STTR compare to venture capital funding?
In general, SBIR/STTR Phase I proposals have about a 9-18% probability of success (although the odds improve for well-planned and written proposals that adhere to agency-specific requirements), and it takes about nine months for receipt of actual funding. Phase II proposals are funded at a much higher rate – >35% depending on the agency. Unlike angel or VC investments, there is no need for a personal introduction, to give up equity, or to provide a board seat. However, if an entrepreneur concludes that a venture capital investment will be needed in the future, funding from the SBIR/STTR programs can be used to “de-risk” a company’s technology and position it to attract private investment.
What are the three phases of the SBIR/STTR Program?
The SBIR Program is structured in three phases. For all phases, it is important to carefully read the specific agency, component or institute’s instructions in the current solicitation since there are agency-to-agency differences (and even component-to-component differences in some agencies like Dept. of Defense). Even if you have previously applied for SBIR/STTR funding, changes can occur so heed the CURRENT instructions for each individual agency.
Phase I. During Phase I, the company is required to demonstrate the technical merit, feasibility, and commercial potential of the proposed product or service. The guideline for SBIR/STTR Phase I awards is $150,000 in total costs for a 6-12 month project. Agencies have the flexibility to award more or less money in Phase I. A successful Phase I project is a prerequisite for applying for Phase II funding.
Phase II. Continued R&D funding for Phase II is based on the results achieved in Phase I and the technical merit and commercial potential described in the Phase II proposal. The guideline for SBIR/STTR Phase II awards is $1,000,000 total costs for a 2-year project. Agencies have the flexibility to offer smaller or larger Phase II awards. Several agencies offer post-Phase II funding opportunities to continue the R&D activities.
Phase III. The objective of Phase III is commercialization of the results of the development project. Depending on the agency commercialization can have different meanings. For procurement agencies commercialization might involve selling products or services to the agency as a customer. For granting agencies commercialization typically involves selling to private sector customers. SBIR/STTR funds cannot be used for commercialization. However, follow-on purchase orders or contracts from other federal sources are possible. Many agencies have commercialization assistance programs to help awardees plan and/or implement their commercialization strategy.
Can a firm go directly to a Phase II award without having to compete for Phase I?
Some agencies do offer a program called Direct to Phase II that allows the applicant to bypass the Phase I award. This program is only available for SBIR (not STTR) and not all agencies participate, so check the SBIR solicitations and websites for specific agency participation.
What is the difference between a SBIR and a STTR?
The primary difference is that SBIR allows, but does not require, the involvement of a non-profit research institution, while STTR requires collaboration (in the form of a sub-contract) with a non-profit research institution. In either case, the applicant organization is always the small business.
How do I know if I’m eligible for SBIR/STTR funding?
The 2012 reauthorization legislation has resulted in changes with regard to ownership, control, and size. Either for-profit companies or joint ventures can be eligible if they meet the new requirements. Potential applicants with questions regarding eligibility should refer to the “Small Business Size Regulations”, Final Rule, Federal Register citation, Dec 27, 2012 for complete details.
Ownership and Control
The 2012 and 2017 reauthorizations stated that eligible SBCs must be majority-owned (greater than 50%) by:The 2012 and 2017 reauthorizations stated that eligible SBCs must be majority-owned (greater than 50%) by:
- Individuals who are U.S. citizens or permanent residents,
- One or more other SBCs (as long as each is majority-owned and controlled by U.S. individuals), or
- Any combination of (1) and (2).
In addition, at each agency’s discretion, eligible SBCs can now be primarily owned by venture capital (VC) companies, hedge funds (HF), and/or private equity funds (PEF) as long as no one firm owns more than 49% of the SBC. Check the agency’s eligibility criteria to determine if they have opted into this rule.
Under both the old and the new rules, an eligible SBC must have fewer than 500 employees (both full-time and part-time employees are counted; not full-time equivalents). However, employees of any organizations “affiliated” with the SBC must also be counted. Affiliation is a complex issue that might be based, for example, on ownership, stock options/agreements, common management, etc. The new rules cite several new examples:
- Although ownership of more than 50% of the SBC is always affiliation by definition, even greater than 40% ownership might constitute affiliation in certain cases where it allows control of the SBC,
- An SBC is affiliated if it depends on another organization for more than 70% of its receipts (i.e., revenue),
- An exception is carved out for SBCs owned by VC/HF/PEF; no affiliation exists between portfolio companies simply because they share common investors.
Who determines eligibility?
Applicants self-certify in their applications that their company meets eligibility requirements. You should be certain of your compliance with the eligibility requirements before formally certifying as an SBC. Information on SBA size determination and protest procedures can be found at www.sba.gov/size.
Are there differences in how each agency manages their SBIR/STTR program?
Absolutely, and you should always check the individual agency websites (see Helpful Links) for exact information and instructions. Differences include the amount of available funding and award amounts, R&D topic areas, the number and timing of solicitations, payment schedules, the application review process (internal or external), type of award (grant or contract).
What are the specifics on internal vs. external proposal review?
Internal review is done by panels composed of agency personnel. Agencies that review internally include the Dept. of Defense and the Dept. of Homeland Security. The National Institutes of Health and the National Science Foundation use so-called “peer review,” that is external panels of technical experts.
What is the difference between grants and contracts?
A grant is an agreement to accomplish something for the public good in exchange for money, property or services. Specific topics for grants are typically investigator-initiated. Agencies awarding grants are: HHS (NIH, CDC, FDA, ACF), NSF, USDA, and DOE.
A contract is an agreement to provide a product or service that is of direct benefit to the awarding agency. Contracting agencies offer topics for response, typically with an 8-12 wk. window. Contracting agencies include DOD, DHS, EPA, DOT, NASA, DOC, ED and NIH (~5% of their overall SBIR budget).
Can I ask for money for commercialization assistance?
Several agencies (e.g., DOD, HHS, DOE, NSF, USDA) have started Commercialization Assistance Programs (CAPs) over the past several years [for Army, Navy, and Air Force the term is Commercialization Readiness Program (CRP)]. Depending on the agency, CAPs may be available to both Phase I and Phase II awardees and provide services by independent consultants contracted by the agency in defined subject areas. Typically, slots are limited, so be certain to consult your SBIR/STTR program manager about the agency’s application procedures and deadlines to insure your participation.
The latest reauthorization of the SBIR/STTR programs has added a new option. Applicants can now request an additional $5,000 per year to pay for commercialization assistance by the consultant of their choice. (Note that if you choose this option you cannot also participate in the agency provided commercialization assistance programs). This budget item is above and beyond the maximum budget limits. For example, a Phase II proposal that requests the maximum budget to execute its technical plan, can add an extra $10,000 ($5,000 per year) for commercialization assistance over the two-year project. This expense must be described in the Budget Justification and supported by a letter of commitment from the consultant that will provide the assistance. Carefully review your specific Funding Opportunity Announcement to be certain this option is available in your situation and be sure to talk with the appropriate agency personnel to further determine what the best option is for your company.
How long will I have to wait after I submit my proposal to find out if I will receive funding?
Nine of the agencies (Dept. of Defense, Dept. of Energy, NASA, US Dept. of Agriculture, Dept. of Education, Dept. of Commerce, Dept. of Homeland Security, Dept. of Transportation, and Environmental Protection Agency) are required to issue notice of awards to applicants within 90 days of the submission date. The National Institutes of Health and National Science Foundation may take up to one year to issue award announcements.
SBA’s FY2013 Annual Report on the SBIR/STTR programs cites these figures for “average time between Phase I Solicitation Close and Award Notification (days)”.
DOE SBIR and STTR: 86
NASA SBIR and STTR: 126
NSF SBIR: 177 STTR: 161
Note: DOD and HHS did not report their figures
Can I apply for an SBIR if I am working full-time at a University or a large corporation?
Yes. However, the for-profit small business must be established prior to submitting the application, and at the time of award it must be the primary place of employment for the project’s Principal Investigator (PI) or Project Director (PD). There are nuances within the various agencies so be sure to read the solicitation thoroughly. Note that these rules are different for STTR projects so, again, it is important to thoroughly read the solicitation.
May a portion of an SBIR award be subcontracted?
Yes. For Phase I, the proposing firm must perform a minimum of two-thirds of the research. One third may be subcontracted to other firms and/or research organizations. For Phase II, the proposing firm must perform a minimum of one-half of the research. These fractions are calculated based on the project budget. Note that these requirements are different for STTR projects.
Can I win SBIR/STTR funding if mine is a virtual company?
Under current SBIR rules, your small company can submit a proposal while you are still a virtual company, but you must meet all of the eligibility requirements described above before you can receive funding. That includes having employees of the company who do a certain percentage of the SBIR work in company controlled facilities. Depending on whether you are pursing SBIR or STTR, there will be additional PI eligibility requirements that must be met. Companies that intend to continue operating as virtual companies (e.g., without company controlled research facilities and employees) typically will not be qualify for an award.
When can I submit an application?
There is now more emphasis on Fraud, Waste and Abuse. Can you explain?
As part of the 2012 reauthorization of the SBIR/STTR program, Congress mandated additional measures to prevent Fraud, Waste and Abuse in the SBIR/STTR program. As a result, the Small Business Administration maintains a Company Registry on their website at www.sbir.gov where companies will self-certify their eligibility during the life cycle of any SBIR/STTR awards.
In addition to “life cycle” certification, where and how companies perform on SBIR/STTR projects are also subject to additional scrutiny by SBA and the agencies, including:
- Accurate representation of company controlled facilities;
- Employment status of the Principal Investigator;
- Adherence to subcontracting guidelines;
- Submission of same deliverables for multiple awards;
- Duplicate awards for the same or similar work.
For more information, read our Blog post on the subject.